FDIC Law, Regulations, Related Acts

4000 - Advisory Opinions

Collateral Requirement of Federal Reserve Act
Section 23A on Loans to Unaffiliated Third Party

FDIC-88-61

September 13, 1988

Gerald J. Gervino, Senior Attorney

In your memorandum of August 18, 1988 you raised a question
concerning the application of collateral requirements under subsection
(c) of section 23A of the Federal Reserve Act, 12 U.S.C. § 371c
(1982). ["Section 23A"].

The facts of the situation with which you are concerned involve a
non-member bank lending to unaffiliated third parties who use the
proceeds to purchase stock in an affiliate and pledge that stock as
collateral for a loan. Examiners in your region have used section
(a)(2) of Section 23A ("Attribution Rule") to find transactions
of this nature subject to the collateral requirements (subsection (c)
of Section 23A). However, they have been confronted with a staff
opinion of the Board of Governors of the Federal Reserve System which
is published as the Board's staff opinion of March 19, 1984, 3-1199.
The opinion states that a member bank's acceptance of the securities of
an affiliate as collateral for a loan by the member bank to an
unaffiliated party is a transaction subject to the quantitative
limitations, but not the collateral requirements, of Section 23A.

We would follow this opinion of the staff of the Board of Governors
of the Federal Reserve System in cases where the bank had extended
credit to occasional borrowers who had presented affiliate securities
as collateral. This is because we would be reluctant to overrule the
obvious lack of coverage under the collateral requirements of
subsection (c) for "covered transactions" under subsection
(b)(7)(d). The latter provision covers the acceptance of securities
issued by an affiliate as collateral security for a loan or extension
of credit to a third party. However, if the bank is actively promoting
or otherwise involved in a program to attract loans secured by the
affiliate's obligations, we would consider the
provisions of the attribution rule
applicable. If the attribution rule applies, it would bring into play
the collateral requirements of Section 23A.

Under the latter circumstances, you ask if a subsection (c)(4)
violation would supercede a (c)(1)(d) violation in the absence of any
additional collateral or if a bank may be cited for two violations in
one transaction.

Technically it would appear to be two transactions, although there
would only be one remedy for the overlapping part of the violation. A
bank exceeding the lending limits of (a)(1) would be in violation of
that statute under coverage obtained through (b)(7)(d) or through
(a)(2). Violation of the collateral provision of subsection (c) would
only arise because of the use of the attribution rule. Thus, the only
technical double violation here would be of the lending limits
contained in subsection (a)(1).